What's the return on a diversified portfolio of hip alternative investments?

There's a healthy overlap between people with an outside-the-box attitude towards funding travel and those interested in alternative approaches to savings and investment:

  • Kiva has long been a (controversial) tool used by travel hackers and outside-the-box thinkers to earn miles, points, and cash back by making short-term loans funded with rewards-earning credit cards.
  • More recently, Greg the Frequent Miler has been doing yeoman's work (followup here) reporting out the similar, albeit much riskier, possibility of funding Kickfurther (my personal referral link) "Consignment Opportunities" with credit cards to earn both credit card rewards and investment returns.
  • At some point I must have signed up for a Fundrise account, and they've been badgering me to invest in their "Income" and "Growth" eREIT's for weeks now.
  • Finally, if you listen to any popular ad-supported podcasts you've likely heard about Wunder Capital and their solar power investment funds.

Now, the last thing you want to do is put all your speculative eggs in one basket, so I got to wondering, what kind of return might you get from an equally weighted portfolio of all these investments?

Annualizing "target" returns

The first thing to take into account is that the investment horizon for each of these vehicles is different, so we need to adjust the various returns appropriately. I'll use $1,000 investments in each example for ease of comparison.

  • Kiva loans funded with a 5% cash back credit card might earn more or less than 5% because of the varying term of Kiva loans. A recent search for short-term, high-quality Kiva loans returned 15 loans, all of which had a duration of 8 months. Assuming you wait to reinvest your Kiva repayments until all your loans have been repaid, and you suffer no defaults or delinquencies, you could invest $1,000 1.5 times per year, for a total annualized return of 7.5%.
  • Kickfurther consignment opportunities funded with a 2% cash back credit card will yield 2% cash back, plus your total Kickfurther principal and interest payments, minus 1.5% of your Kickfurther principal and interest payments. In other words, a 12-month consignment opportunity offering a 16% return on a $1,000 investment will pay $20 in cash back plus 98.5% of $1,160 ($1,142.60), for a total annual return of 16.26%. Assuming the four currently available consignment opportunities are typical in both length and rate of return, we can mechanically compute an average annualized return of 14.65%.
  • Fundrise works a little bit differently since you're investing in eREIT's which are designed to be held for the long term and which pay out throughout the life of the investment and then return remaining (potentially appreciated) principal at the end. Under the "accountability" tab for each eREIT, you can see the returns Fundrise seeks from each investment fund. For the Income eREIT they will charge no management fee if the annualized return is less than 15%, and for the Growth eREIT they'll pay a penalty if the annual return is below 20%, so we can use those as the "target" returns for each fund.
  • Finally, Wunder Capital is currently offering a "Term Fund" with a target return of 8.5% and an "Income Fund" with a target return of 6%.

Building a diversified hip alternative investment portfolio

If I were interested in building a portfolio of these alternatives, my model would be diversifying across the four platforms somewhat like this: by putting $1,000 in as many suitable Kiva loans as possible, $1,000 across as many Kickfurther consignment opportunities as possible, $1,000 in each of the two Fundrise eREIT's, and $1,000 in each of the Wunder Capital funds.

That would produce a $6,000 investment with a target annualized return of 11.94%.

This would be a very stupid thing to do

There are at least two questions worth asking about such a diversified portfolio of hip alternatives:

  • How likely am I to make more money with this portfolio than I would with conventional investments?
  • How likely am I to make any money at all, versus losing some or all of my principal?

The first question speaks to the question of whether the higher target return you're seeking will adequately compensate you for the added risk you're taking with these bizarre, untested investment vehicles. After all, Vanguard will sell you a low-cost mutual fund invested in corporate junk bonds any day of the week. Why buy untradable junk from strangers when Jack Bogle will sell you relatively liquid junk?

The second question is whether you'll be compensated at all, or whether an economic downturn, poor management, and/or fraud will wipe out your investment completely with little or no warning.

But, gambling is fun

There's a painful irony to the fact that these alternative investment vehicles have been legalized and are being aggressively promoted at a time of low interest rates and pessimism about future returns in the stock market, because those conditions have retail investors desperately fishing around for investment opportunities with a higher return than their passively managed index funds. Frantically taking bigger and bigger risks makes the problem of low returns worse for all the investors who pick the wrong alternatives to invest in (and there are a lot of wrong alternatives).

On the other hand, for the dwindling number of investors with a secure path to retirement and enough money left over to gamble with, these alternatives seem like they'd be fund to play with. And who knows? You might even make some money.

Things US Bank told me about Flexperks Travel Rewards

It's difficult to know how to frame information you receive from US Bank over the phone. For example, a US Bank representative once told me I could product change my Club Carlson Business Rewards card to a Business Edge Cash Rewards card. I couldn't.

But after someone on Twitter reached out to me with a question about some language in the Flexperks Travel Rewards terms and conditions, I decided against my better judgment to call and ask what the heck they meant.

The $120,000 cap on Flexperks Travel Rewards earning

If you visit the website of the US Bank Flexperks Travel Rewards credit card, you'll find the following description of the card's rewards structure:

"Yearly Award Level: For Net Purchases less than or equal to $120,000, earn one FlexPoint for every $1. If during the calendar year, Net Purchases exceed $120,000, all FlexPoints for the remainder of the calendar year are earned at a rate of one FlexPoint for every $2. Exemption: FlexPerks Travel Rewards Visa Signature AutoPay Cardmembers who select the full payment option on the first available payment date after their statement date."

I've mentioned before the $120,000 calendar year purchase limit on FlexPoint earning, but never noticed the "exemption" for people with AutoPay set up. So I decided to call.

My representative had no idea what he was talking about

This is pretty much par for the course when calling US Bank, so I wasn't terribly surprised. But I kept asking for clarification, so he put me on hold and talked to someone who had worked at US Bank for all of 2 years(!), and who gave him the "complete" picture.

My representative's (secondhand) information was that if you have autopay set up to pay your bill in full, then there's no limit on Flexpoint earning. If you don't have autopay set up, then you have to make your payment on the first available payment date after your statement closes.

That sounds like nonsense, and strikes me as vanishingly unlikely to be correct.

A quick aside on base points and bonus points

There's some important credit card terminology that's relevant here. Typically, a credit card will earn some number of "base" miles or points on purchases everywhere. The American Express Hilton HHonors Surpass earns 3 "base" HHonors points everywhere, the Chase Sapphire Preferred earns 1 "base" Ultimate Rewards point everywhere, etc.

Then in certain spend categories, a credit card will earn "bonus" points. The HHonors Surpass card earns 9 "bonus" HHonors points for purchases made at Hilton properties, for example, and the Sapphire Preferred earns 1 "bonus" Ultimate Rewards point at restaurants and on most travel purchases.

That's not how the Flexperks Travel Rewards terms and conditions are framed

The language I quoted above was from the second clause of the rewards structure. The third clause reads:

"FlexPerks Travel Rewards Visa cardmembers may earn additional FlexPoints for purchases at merchant locations in the following categories: airline, gas or grocery (each, a "Category"). You will earn FlexPoints at a rate of two FlexPoints for every $1 in the one Category in any given monthly billing cycle that has the highest total of Net Purchases charged to your Account (the "Highest Category")...FlexPerks Travel Rewards Visa Signature cardmembers will be awarded FlexPoints at the rate of two FlexPoints for every $1 in Net Purchases during the current month's billing cycle for any merchant location that classifies itself as having telecommunication services/products."

There is no language about "base" FlexPoints and "bonus" FlexPoints: these are simply given as the earning rates for a variety of purchases. The same is true of charitable contributions, in the fourth clause:

"FlexPerks Travel Rewards Visa Signature cardmembers will earn FlexPoints at a rate of three (3) FlexPoints per every $1 in Net Purchases during the current month's billing cycle for any merchant location that classifies itself as a Charitable and Social Service Organization."

But that is how FlexPoints are actually earned

Here's a screenshot from one of my US Bank Flexperks Travel Rewards statements:

As you can see, US Bank is actually following the usual practice of awarding "base" and "bonus" points separately on each statement.

Conclusion: I have no idea what's going on at US Bank

I've never bumped up against the $120,000 limit calendar year limit, so I don't know how it's implemented in practice. But it seems to me there are three possibilities:

  • Earning is actually capped at $120,000 in total purchases, and all spend beyond that earns one FlexPoint per $2 spent, unless you set up AutoPay and pay your entire statement balance on the first available date after your statement closes. If you do, your earning is uncapped. This would be the simplest reading of the terms and conditions as written.
  • The above, except bonused spend at gas stations, grocery stores, air travel, and charitable contributions is completely uncapped, whether or not you set up AutoPay. This would be another literal reading of the terms and conditions, but would conflict with the above — only one of the two can be true.
  • A hybrid, based on how FlexPoints are actually awarded, whereby "base" points are earned at one FlexPoint per $2 spent above $120,000 but "bonus" point are uncapped. This would mean charitable contributions continued to earn 2.5 FlexPoints per dollar, which would still be a fairly strong choice for making Kiva loans.

Of course it's theoretically possible that the version I was told by my US Bank representative is actually correct: that if you have AutoPay set up at all, then you're not subject to any limits on FlexPoint earning. Possible, but unlikely.

So I'm turning it over to my readers who do even more Flexperks Travel Rewards volume than I do: what's your experience earning base and bonus FlexPoints once you've reached the $120,000 calendar year cap?

Kiva loan duration and repayment schedules

I don't write about making Kiva loans very much anymore, mainly because I don't make Kiva loans anymore! But Kiva loans are a still-working technique to manufacture an uncapped amount of spend in a potentially lucrative bonus category.

I say "uncapped" and not "unlimited," because Kiva loans are very much limited — they're just limited by your ability to find loans that fit within your risk tolerance, not by Kiva's online loan system.

Even if you're just interested in using manufactured spend as a part of your overall savings portfolio, Kiva loans are a strong choice: earning 3% cash back on 6-month loans generates "something like" 6% APY — and you get paid your interest up front (or at least when your next statement closes).

Kiva loan repayment schedules are rarely uniform

At the most recent Travel Con Matt from Saverocity made an important and I think overlooked point about Kiva loans: a loan's repayment schedule is rarely uniform. In other words, a 6 month loan will almost never be repaid in 6 equal installments. Instead, it's more common to see a repayment schedule like this:

If you make a loan to Eliza today, despite the loan having a "7-month" repayment term, you'll get 64.7% of your money back by April 1 — just 108 days from now.

Why it matters (and why it might not)

I take saving seriously, despite not doing enough of it myself. That's one reason why I get upset at so-called "robo-advisors" claiming to do things they cannot do.

If you do want to include "alternative" investments in your savings portfolio, it's important to evaluate them critically; it's just as easy to make mistakes valuing a high-interest savings or checking account as it is when picking a mutual fund.

Fortunately, in the case of Kiva repayment schedules, you have a big advantage: you get to pick the loans with the repayment schedules that best suit your needs! By picking "front-loaded" repayment schedules, you have access to more of your money faster, letting you put it back to work and increasing your actual APY above the 6% a simple "6-month loan" model would suggest.

That's the good news. The bad news is that Kiva isn't enthusiastic about people cycling money in and out of their accounts rapidly. After doing so for a few months, I was told that I could no longer make online withdrawals, but would instead have to request paper checks. They did not, in fact, enforce that restriction (I was still allowed to request withdrawals online), but as a general rule it's not ideal to use techniques with manual oversight as aggressively as we do techniques that are largely or entirely automated.

In other words, while Kiva loans are a great and still-working technique to manufacture uncapped amounts of spend, you probably can't replace your entire savings portfolio with short-term, high-quality loans.

Bonus points at Amazon with US Bank Cash+

While Amazon.com as a rule doesn't participate in shopping portals (their partnership with Hawaiian Airlines' online mall ended earlier this year, but purchases only earned 1 Hawaiian mile per dollar, so it was no great loss), it's long been known that the Citi Forward card, which offers 5 ThankYou points per dollar spent at bookstores, would also bonus purchases made with Amazon.

Last quarter I selected bookstores (along with charity)  as one of my bonus categories with the US Bank Cash+ card, which gives 5% cash back in two categories of your choice each quarter, and made a little over $100 in purchases at Amazon to see if US Bank would treat these purchases the same as Citi. And sure enough when my statement closed today, I saw that for $126.95 in Amazon purchases, I had earned $6.35 in cash back:

Although both the Discover More/it and Chase Freedom are bonusing Amazon.com purchases this calendar quarter, this is a great option to earn 5% cash back at Amazon during the rest of the year. And if you spend less than $1,500 on Amazon purchases, you can earn the rest of your cash back through bonused Kiva loans.

US Bank Kiva loans aren't a hack: they're policy

It's long been an open secret in the travel hacking community that US Bank credit cards which have "charity" as a bonus category also bonus loans make through the micro-lending site Kiva.org. This is one of the first hacks that I took advantage of, since if you're using a US Bank Flexperks Travel Rewards credit card you can earn 3% cash back or 6% back in paid airfare by making Kiva loans. Many of those loans have repayment periods between 4 and 6 months, so if you have cash that you're willing to tie up in these loans, you can earn a decent annualized return, even if you're just redeeming your Flexpoints for cash back, instead of airline tickets.

While I mention this trick in my ebook, The Free-quent Flyer's Manifesto, it's never been entirely clear whether this was an oversight on US Bank's part, a side-effect of their payments being processed by PayPal, or was in fact an intentional policy decision.

I've discovered that rather than an oversight, bonused Kiva loans are an advertised benefit of at least one US Bank credit card program.

As I mentioned last month in my post on product changes, I recently changed one of my two US Bank Flexperks Travel Rewards cards into a US Bank Cash+ card (apply in-branch only, or ask for a product change), which has no annual fee and offers 5% cash back on up to $2,000 in spending per quarter in two categories of your choosing (and 2% cash back in your choice of gas stations, grocery stores, or drug stores).

My US Bank online rewards center has now updated with the Cash+ rewards program, so I decided to check out what the 5% categories were this quarter. "Charity" was among them, as it has been since the card first became available. Unlike with the Flexperks Travel Rewards card, however, the Cash+ rewards center provides a lengthy list of organizations where spending is eligible for 5% cash back. And sure enough, there in the second column is Kiva: 


Of course, the fact that US Bank advertises Kiva as one eligible merchant that's eligible for the "Charity" category bonus right now doesn't mean they will do so forever, or even that "Charity" will return as a bonus category next quarter, since these categories are regularly changed and reshuffled. However, at this point I think this is the low-hanging fruit of the travel hacking game, and I do strongly recommend at least thinking about getting in on the Charity category bonus with one of those two cards.

Things to keep in mind

Of course, this isn't a risk-free play and it isn't for everybody. Here are some things to keep in mind:

  1. Kiva loans are not risk-free. I've never had a default among the approximately $10,000 I've loaned through Kiva, but it certainly happens. The average default rate appears to be about 0.98%.
  2. You can minimize, but not eliminate, the risk of default by selecting loans that are offered by partners with a 0% delinquency and default rate, and that have a risk rating of 5 out of 5 stars. This will reduce the number of loans you can consider, however.
  3. Kiva deposits and withdrawals are processed by PayPal . That means you need an open PayPal account in order to make Kiva loans. This may not be an option if you've have your accounts closed or if you've been blacklisted by PayPal (more on this coming soon).
  4. Deposits to Kiva are instantaneous, withdrawals take 1-2 weeks. This has actually improved considerably: formerly withdrawals could take up to a month to process.
  5. US Bank credit cards can be difficult to be approved for. I've always received immediate online approval, but that's not the case for everybody, especially those with lots of recent credit inquiries. One of my most popular blog posts was my step-by-step instructions for one trick you can use to increase your chances of approval for US Bank cards.

Let me know in the comments if you have any more questions on making Kiva loans with US Bank credit cards.